Karen Walker/ATLANTA
If prizes were to be handed out to those industries which have seemed most without hope in recent years, then the fixed-base-operator (FBO) business would probably walk away with more than its fair share of accolades. By contrast, 1996 seems to have been the kindest year in almost a decade.
Survivors of this recession-torn industry, which has seen massive consolidation, airport closures and profit margins squeezed almost to non-existence, now almost unanimously report real optimism. Ever cautious, however, they also see a wave of new regulations and taxes being introduced or proposed and are concerned about their potential effects. "We've been hit around the head so often, we are naturally suspicious of anything that might knock us down again," observes one operator.
First, the good news. The US National Air Transportation Association (NATA) has been tracking general-aviation (GA) business activity using what it calls the Aviation Business Barometer. The barometer index combines monthly reports of aviation-fuel sales, charter revenues and flight hours, flight-instruction hours, and maintenance sales. The latest figures, for July, show an overall increase in business activity, led by a 30% increase in Jet-A fuel sales. Both maintenance and flight-training activity also increased sharply during July, contributing to a general picture which displays an upward curve.
This means that FBOs in the USA, on the whole, are doing more business. This is borne out by the experience of individual FBO owners, who talk in terms of the past 12 months being the best they have seen for many years, with sales up, on average, by 5% or more. "There is an optimistic feeling that, if we continue to be vigilant, this business is going to be good again. Those of us who have been in it for a while hope that comes to pass because, while it is not a rich industry to be in, it is a fun industry," says Mark Moberg, president of Leading Edge Aviation Services in Tampa, Florida.
Jet Aviation, the largest international aviation-service company, has just added a fourth major FBO, in Las Vegas, Nevada, to its US network and earlier this year opened Jet Maintenance in Singapore (see box). "We are very optimistic," says Heinz Aebe, vice-president of marketing. "In 1994 there was a slight increase, but now it's really jumping. We expect to see continued growth over the next couple of years," adds Aebe.
Phillips 66, which supplies fuel to about 750 FBOs in the USA, similarly sees reason to "take heart", pointing to recent forecast statistics produced by industry organisations such as the NATA, the National Business Aircraft Association (NBAA) and the General Aviation Manufacturers Association (GAMA). Those forecasts, says Phillips, predict that by the year 2000 there will be up to 3,800 FBOs remaining in the USA. This contradicts a more gloomy 1994 estimate that only 2,000 FBOs out of 4,500 would remain. Although the 3,800 figure still necessitates more consolidation before the turn of the century, Phillips 66's general-aviation manager, Allen Bretz, is not unduly worried. "I am hearing from many of our customers that sales are up - not a lot, but a little up - and people are optimistic about their business. I am not hearing many negatives," says Bretz.
Still, there remain issues that have irritated the FBO industry for some time, and they have been joined in 1996 by some new concerns. While they do not amount necessarily to bad news, they temper the optimism.
Troublesome areas
NATA's Aviation Business Barometer, for instance, highlights a few troublesome areas. Air-charter activity slowed in July and appears to be heading towards an overall trend of little growth over the 12 months since September 1995, when the barometer was started. More concerning, aviation gasoline (avgas) sales slumped in July - a direct contrast with the 30% increase in turbine-fuel sales recorded for the same period.
Paul Meyers, vice-president of the FBO Resource Group in Denver, Colorado, which provides a range of services to FBO operators and GA airports, is not surprised by the slowing of avgas sales. "Fuel prices, at least in Jet-A fuel, have been very stable over the long run, but avgas is a different matter. Some people have got out of the avgas business altogether and that has caused supply and demand problems. Avgas has increased in price this year by a pretty substantial amount," he says.
Another fuel-related problem is the continued shrinking profit margin which fuel sales now offer, where this was once the main source of revenue for most FBOs. According to Phillips 66, increased pricing competition between FBOs over the past five years has caused fuel profit margins to drop by up to 20%, leaving a small or non-existent margin. While this has been disastrous for some FBOs, the cleverest operators have turned it into something of a saving grace by rethinking the structures of their businesses and adding other GA services, such as maintenance and avionics, that are complementary to their core business and which can help replace much of the profit margin lost in fuel sales.
Activities such as selling timeshares of corporate aircraft have also cut operators' costs while at the same time putting more money into FBOs. "We are seeing a lot of specialisation and focusing on certain services by those FBOs that have survived in the marketplace," says Meyers. "By and large, the aircraft out there are older, so their maintenance requirements are higher. We are seeing FBOs specialise in the type of service they offer - such as airframe repair, accessory repair or turbine repair."
Associated with this trend is unbundling, a term used to describe the charging of fees for services provided by FBOs which have traditionally been "free" because they were built into the fuel profit margin. These "free" services include everything from coffee and cookies to crew cars, private lounges, conference rooms and hospitality staff. "We really think that unbundling is the way of the future," says Meyers. "A lot of FBOs are now having to do this to survive. Through the 1980s, the FBO wanted to add value and not just be a gas station, so the red carpet service, built into the fuel profit margin, came about. But that has become something of the Achilles heel to an industry which now has a $1 margin in fuel sales. Unbundling is trying to equalise that burden."
Typically, an FBO which unbundles its services will continue to provide them to a customer free-of-charge so long as he purchases fuel from that operator; otherwise, a user-fee is imposed. There may be a fixed-price fee or an la carte menu of priced services.
Educating customers
A certain amount of delicacy is needed in introducing an unbundling policy - a pilot who has become used to not paying for such services as coffee and crew lounge might find it difficult to accept the change. Phillips 66 believes that education is the key to bringing FBOs and pilots to a better understanding of the issues involved. "Over the last 18 months, unbundling has grown more and more popular," says Phillips 66's aviation manager, Jill Bogan. "Our main contact is with the FBOs and we are going to them and explaining that they must explain their pricing policies. If they do that well, there is usually no problem." Meyers agrees: "You have to understand the dynamics of unbundling. It has to be properly developed and sold, and people have to understand it for it to be successful."
Unbundling may ultimately be the norm for all FBOs, but operators do at least still have a choice in this issue. What for many seems to be the darkest cloud on the horizon, at least in the dominant US market, is the possibility of new regulations and additional taxes being imposed on an industry just as it gets back on its feet.
"We are all very concerned - anxious, even - that new user fees imposed on corporate and recreational pilots would reduce flying," says NATA vice president Andrew Cebula."That is an overwhelming issue for us." In particular, NATA - and most of the GA industry - is horrified at the recent Clinton Administration proposal to place a flat fee of $250 (£166) per departure on business aircraft. NATA's viewpoint is that the GA pilot is an incremental user of a US air-traffic-control system operated for the airlines.
Writing what it regards as a blank cheque to the US Federal Aviation Administration in the form of extra taxes is not the answer to the FAA's financial problems, says NATA. "What we want is, first, an outside study of FAA funding needs, including ways of how they can operate more efficiently; then for it to be worked out how best to approach that more efficient operation," says Cebula. Leading Edge's Moberg probably speaks for most FBOs when he talks of his fears of additional fees and taxation. User fees could seriously harm small airports and have a stagnating effect on the industry, he says. "This $250 fee is ludicrous - we have flights that don't even cost $250. How can you justify that?.
Another major issue - proposed changes in crewmember flight and duty times - is on ice now that the deadline for industry comment has passed, but is being watched carefully. Cebula says that NATA rallied about 800 people to oppose the proposed regulation because it fears that the new rules would effectively kill the on-demand charter industry. "We also found that there is a direct correlation between on-demand charter, fuel sales, and maintenance, that amounts to about 20% of those businesses. If you kill that segment of the industry, there will be a 20% decrease in those sales - so there is a ripple effect right down to the FBOs," says Cebula.
Government challenge
Tom Mitchell, vice-president US service centres at Jet Aviation, agrees. "Although many of the regulations that NATA has recently been active in may seem directed towards charter interest, the health of the charter industry has major ramifications on the industry, obviously including FBOs. NATA may, in fact, be our only effective resource for us to unite and appropriately challenge the big arm of the Government when necessary. As we may have seen all too often, we are often victims of unreasonable regulations - not even meant for us - or considered as a resource by which to contribute more than our share of taxes," he says.
Among many other changes that NATA fears are looming in a new tide of regulations will be the rule, to be enforced from December 1998, that all aviation fuel-storage tanks must be double-walled and underground. Although there have been years of notification of this change in law, NATA still sees that many small FBOs will not be able to comply and will, therefore, cease to function.
Phillips 66 has recognised this particular concern among some of its FBOs this year and, according to Bogan, is looking at offering some form of financial assistance where needed - an example of how the old-style airport landlord/tenant relationships have given way to partnerships that work together to find out how best to survive - maybe even thrive - in one of the world's toughest industries.
Source: Flight International
